Fine line: star fund manager Neil Woodford’s favoured stocks are big pharma and tobacco but he is worried about banks like HSBC

Star fund manager Neil Woodford today sounded the warning bell for the banking sector as he sold his stake in Britain’s largest bank, HSBC.

Woodford, who quit Invesco Perpetual to set up his own venture last year, warned investigations into the manipulation of market benchmark rates and foreign exchange markets could land HSBC with “significant financial penalties” and prevent it from growing its dividend.

He said: “I started to build a position in HSBC for some portfolios in May last year and I included it in the portfolio of the Woodford Equity Income Fund at launch.

In recent weeks, however, I have started to become more concerned about one particular risk: that of ‘fine inflation’ in the banking industry.

“Banks have attracted many fines in the post-financial crisis world as regulators and policymakers have cracked down on past and ongoing wrongdoings in the industry. The size of the fines, however, appears to be increasing.”

About 2.68% of Woodford’s Equity Income Fund was invested with HSBC, amounting to about 10 million shares, a sub-1% stake in the lender, worth nearly £65 million.

His warning is likely to reverberate across the sector with bumper fines handed out recently. Shares in HSBC fell 6.5p to 645.6p as HSBC declined to comment.

Woodford continued: “HSBC is a conservatively managed, well-capitalised business with a good spread of international assets. As chief executive, Stuart Gulliver has done a great job over the last four years, making a very complicated organisation much simpler to understand.

"It is still a huge and complex business, however. Its 2013 Annual Report & Accounts document runs to around 600 pages, many of which are dedicated to the risks that it faces.”

On the fines being paid by banks, he added: “I am concerned that these fines are increasingly being sized on a bank’s ability to pay, rather than on the extent of the transgression.”

In a recent study, Roger McCormick, a former law professor at the London School of Economics, found the 10 worst-hit banks, including Bank of America, Lloyds Banking Group, Royal Bank of Scotland and HSBC paid just under £100 billion in fines between 2009-13.

In its Financial Stability Report in June, the Bank of England warned “costs related to past misconduct” remained a drag on bank profits.